February 11, 2013: A Rally with Less Gusto

Markets lost some exuberance last week as news out of Europe weighed on U.S. investors. Despite some selling pressure however, the rally rolled on as the S&P 500 edged to a five-year high.[i] Major indices ended the week mixed, with the S&P 500 gaining 0.31%, the Dow losing 0.12%, and the Nasdaq gaining 0.46%.[ii]

Friday showed very low volume as snowstorm Nemo pounded the Northeast and traders watched the clock, waiting for the final bell to ring so they could hustle home. Even so, a batch of encouraging economic data was enough to push the S&P 500 to its highest level since November 2007. Reports showed that international trade in China and Germany has improved, and that the U.S. trade deficit narrowed in December, indicating that global demand is improving.[iii] To the contrary, the December wholesale inventory report released earlier in the week showed a 0.1% decrease, which was significantly worse than expectations. This carries negative implications for the upcoming revised fourth quarter GDP growth report as the Bureau of Economic Analysis had estimated inventory growth of 0.7% in their preliminary estimates.[iv]

Troubles in Europe drove most of the market action last week as downbeat European equities prompted selloffs in the U.S. Scandals have rocked European markets as regulators investigate several banks for trading irregularities[v] as well as one of Greece’s leading statisticians, who has been charged with falsifying fiscal data.[vi] According to European Central Bank President Mario Draghi, the Eurozone economy remained weak and contracted in the second and third quarters of 2012. Two quarters of negative growth meets the technical definition of a recession, and economists widely expect the malaise to continue into 2013. On the positive side, recent gains in European equities and a strong Euro show that investors have regained confidence in the Eurozone’s ability to clean up its mess.[vii]

Looking ahead, analysts will have a few January and February economic reports to chew on this week, which economists widely expect will show that the U.S. economy started off 2013 at a modest pace. January retail sales figures come out on Wednesday, and the preliminary February reading on consumer sentiment will be released Friday.[viii] Chinese markets will be closed all of this week in observance of the Chinese New Year, so attention will be focused on European and domestic headlines. While there is no way to know what will happen with the winter we’ve been enjoying, our primary hope is that the fundamentals will continue to show improvement in the worldwide economy.

ECONOMIC CALENDAR:

Tuesday: Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Empire State Mfg. Survey, Treasury International Capital, Industrial Production, Consumer Sentiment